Financing Options For Small Tech Companies

Posted on by Fred Wilson & Jason Li

061-financingoptions

I went back and looked at all the MBA Mondays post I’ve written to date and what jumped out at me was a lack of discussion of financing options. Since the audience for MBA Mondays is largely entrepreneurs and the technology industry, I will frame this discussion in the context of what options are available for small tech companies. In this series of posts we will discuss the following financing options:

  • Common Stock
  • Convertible Debt
  • Preferred Stock
  • Venture Debt
  • Capital Equipment Loans
  • Leases
  • Bridge Loans
  • Accounts Recievable Financing

These are the options I’ve seen used most frequently in my time working with small tech companies. If you have suggestions for other financing options to be covered, please leave them in the comments and I will consider adding them to the list.

We will start next week talking about common stock and go from there.

 

From the comments

mike gilfillan added:

Don’t forget Gold Card financing. Remember all those “pre-approved, no interest payment, high limit credit card offers”? — I mailed back 6 at the same time and got approved for all of them. I bootstrapped my first Internet company with $60,000 in credit card
debt. I was 3 years out of college. Paid it all off in first year of business. Although this probably isn’t as easy today due to financial crisis, but probably will be in the next few years.

To which ShanaC replied:

I keep thinking this solution is very high risk and that there should be better ways of getting that loan with lower liability….

To which mike gilfillan answered:

Actually, at the time given the circumstances it was pretty low risk:
no loan to personally guarantee, no equity to give up, no friends and family relationships to put on the line.  No loan sharks to come break your legs.

I was fresh out of college and knew that the only risk would be negative marks on my credit score/ratings.   I had grown up hearing stories from my father (an accountant) of how he helped a few of his struggling blue-collar clients negotiate their credit card debt debt way down.  He always said “pay the State first (sales & payroll taxes), then IRS, then secured creditors (loans, equip, rent, etc) … then last on the list pay down your unsecured credit card debt”.

Unrelated to that, ErikSchwartz added:

I got a $500K state grant for a previous company.

The problems are:

The process is epic and convoluted (8 months from application to award).

The reporting and accounting requirements are a PITA.

These organizations do not understand that the technology world moves rapidly and companies who adjust their plans are to be commended not punished.

You need someone nearly full time to manage the process and you need to control information very closely. We had a board member who went shooting their mouth off (and was incorrect in his statements) to one of the state grant people. It took me months to undo what this guy did.

Finally, ours required a match. If I can raise the first $500K for a match, raising the second $500K is easy.

Whenever anyone talks about the government getting into the VC business I cringe.

 

This article was originally written by Fred Wilson on May 16, 2011 here.